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The Co-operative group has blamed worsening economic conditions for a decision
to pull out of a deal to buy 632 Lloyds branches.

Lloyds will now press ahead with a flotation of the branches, probably next
year, under its revived TSB brand.

The collapse of the deal will be a blow to the Government, which is fighting
mounting criticism about its failure to inject growth into the economy.

It is also an embarrassment to the Coalition, which hailed the acquisition by
the Co-op, a Manchester-based mutual, as evidence that competition and
diversity was being injected into the banking sector in the

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Deal that carried a health warning

Peter Marks, the Co-op's chief executive, bragged when he agreed to buy the 632 "Verde" branches from Lloyds that he had had the shirt from the latter's back.

Unfortunately, despite not having acquired the shirt or even put it on, it gave his organisation an unpleasant skin infection.

The costs of the acquisition would have exceeded the headline £350 million, with the Co-op confirming The Times's story from January that it was writing off some £150 million in IT systems rendered redundant because of its intention to use the IT systems it would gain with the Verde assets.

The costs also began to show in other ways: the Co-op last month sold its life business, one of its jewels, to raise capital levels as required ahead of completing on Verde.

Co-op's capital position and IT systems were just two of the concerns about this deal originally flagged by the FSA more than a year ago. Others include the lack of banking experience among top management. To this, it might be added, it is, frankly, astonishing that Mr Marks, architect of the Verde deal, planned to leave before the deal was completed.

Co-op should have pulled out of this deal sooner. Never mind having the shirt from Lloyds's back: it has risked breaking its own.